Base and quote are two common terms found in the forex industry. But what do they mean?
Well, currencies are always found in pairs.
This is because the forex transaction is an exchange of one currency to another.
Let’s say a person needs to buy a foreign currency,
He/she needs to sell their local currency to obtain the foreign one.
The currencies involved in the exchange will be displayed as shown.
The currency to the left is called the “base”, and the currency to right is called the “secondary".
A trader decides to buy the pair the EUR/USD. By buying this pair, the trader is buying the EURO and selling the US Dollar.
The opposite is true if this trader sold the EUR/USD pair. By selling it, the trader is selling the Euro and buying the US Dollar.
Whenever you buy or sell a pair, always refer to the base currency first.
For example: EUR/USD = 1.1700
This means, each 1 euro is worth 1.1700 US dollars. In other words, to be able to get one euro, it costs 1.1700 US Dollar.
Basically, 1 unit of the base currency costs “X” units of the secondary currency.
Another common term in forex trading is “pip”. A pip is the change in the fourth decimal in a pair’s price.
For example, an increase by 1 pip in the EUR/USD rate will lead to a move from 1.1700 to 1.1701. But a decrease by 1 pip in the EUR/USD rate will lead to a move from 1.1700 to 1.1699.
The rates of Japanese Yen pairs are displayed differently with just two decimal points.
Let’s say USDJ/JPY = 135.10
So, an increase by 1 pip in the USD/JPY rate will lead to a move from 135.10 to 135.11. However, a decrease by 1 pip on the USD/JPY rate will lead to a move from 135.10 to 135.09.
The final note before ending this video, USD as a currency is always found to the left in a pair. However, with pairs containing one of these currencies (AUD, NZD, and EUR), the quotation will change. The USD will be quoted to the right as a secondary currency instead.
Thank you for listening.